WTO membership to open up Russian market to competition
Russia will become a member of the World Trade Organization (WTO) in 2012. This will open the market for competition and improve the predictability of the operating environment. For the Finnish forest sector, Russia’s accession to the WTO is a welcome step, whereas Russian companies are expecting the implications to be mainly negative. In the short term, Russia’s membership will not bring about significant change to practical operations.
Reduction in export tariffs to increase log exports from Russia to Finland – will Russian companies face raw material shortage?
A reduction in log export tariffs will probably increase log export volumes from Russia to Finland, especially in areas close to the border. It is, however, unlikely that the record volumes of previous years will be reached any time soon, since almost all Russian wood sourcing organisations that are part of Finnish companies have been wound up. Russian companies are worried about increased log exports, as they are already suffering from occasional raw material shortages. Moreover, the price of timber is expected to rise.
The exemption from duty for small-diameter birch, which is important to Finland, will be removed with the introduction of a uniform tariff of 7 per cent for all diameter categories. Correspondingly, the classification by size – which has caused additional costs – will be eliminated, so the overall effect will be positive. The changes related to log exports will become effective without a transition period.
In the last three years, the export of woodchips from Russia to Finland has exceeded even that of birch pulpwood. This trend is likely to continue when the current export tariff of 5 per cent for woodchips is completely removed after the transition period.
Export tariffs for softwood will be cut by about half, which will probably lead to increased softwood exports. The volume quota of 9 million cubic metres set for softwood log exports does not significantly restrict exports to the EU. This quota is almost equal to the total amount of softwood that was exported from Russia to Europe in record years. In 2005, for example, the volume of softwood logs exported to EU member states was 10 million cubic metres and the export tariff was 6.5 per cent. In 2007, an export tariff of 25 per cent was introduced and softwood exports plummeted. In 2010, only one million cubic metres of softwood logs were exported.
Maximum tariffs for key timber grades and wood products according to Russia’s WTO agreement
The tariff for logs below the quota will be between the two extremes: 13 per cent for spruce and 15 per cent for pine. The division of the quota is based on previous imports: traditional importers will be allocated 70 per cent of the quota. In the first three years after the implementation of the quota, a traditional importer will be one that has imported at least 5,000 cubic metres of softwood from Russia in 2004 or 2007. After this, said volume must have been imported in the two previous years. Bureaucracy will also increase in Russia, as the holder of an import licence from the EU must apply for an export licence from the Russian authorities.
The tariffs for the most important export products of the Russian forest industry were set at zero years ago in order to boost the competitiveness of the industry, so the removal of export tariffs due to WTO membership will not change the situation.
In future, Russian customs authorities can no longer use reference prices for determining the customs value of a product; the value must be based on the actual price. This is good news for hands-on operators.
New winds in the Russian market – promising outlook for the wood processing industry
Russia must significantly reduce its import tariffs for industrial products by 2016. Highly processed paper and paperboard products are by far the most important exports of the Finnish forest industry to Russia. Since Russia’s own forest industry cannot meet the demand for these products, the import tariffs have already been lowered to 5 per cent for most products – which is also the ultimate level specified in the WTO agreement, with a few exceptions. For certain products, import tariffs will drop to one-third of the present level.
The Finnish Forest Industries Federation estimates that, given Finland’s current export structure of paper and paperboard products, cost savings will amount to EUR 10 million.
The largest percentage reductions in import tariffs will apply to the products of the wood processing industry. This will enhance the competitive position of Finnish companies. At present, almost all wood products are subject to a 20 per cent import tariff for the protection of domestic production. The import tariff for prefabricated wooden houses, for instance, will be greatly reduced and will stand at 5 per cent in 2016. The tariffs for glued laminated timber, floor tiles, windows and doors will decline by about half.
The current tariff for forwarders and log trucks imported to Russia is 25 to 30 per cent, so the reduction is considerable. Major reductions will be made in the import tariff for heavy-duty forwarders and log trucks: by 2015, it will drop to 5 per cent. In 2009, the tariff was raised by 20 per cent in order to promote mechanical engineering in Russia. No significant changes are expected in the import tariff for harvesting machines: the maximum level is 2 per cent.
Varying expectations in Russia
Russian companies have two kinds of expectations for the impact of WTO membership. In the long run, the opening of the market is expected to accelerate the development of the Russian forest sector, because companies will have to improve their production to succeed in the new circumstances. The reductions in import tariffs for production equipment and machines will also contribute to the modernisation of production.
On the other hand, it is feared that imports will increase, product prices will drop and the earnings of Russian companies will fall, which may hinder the development of new products. All in all, WTO membership is expected to have only minor effects, as the decisive role will be played by the global markets for products.
Metla has published a handbook on the Russian forest sector, “Northwest Russian Forest Sector in a Nutshell”. The book is written in English, and it is designed to be a source of information for companies, authorities, specialists and other interested parties. It can also be used for educational purposes. Read more and order >
Further information
- Researcher Sari Karvinen, tel. +358 (0)50 391 3256, sari.karvinen(a)metla.fi